1. Insuring against the weather:
Using traditional groups to promote index-based weather
insurance in Ethiopia
Guush Berhane, Daniel Clarke,
Stefan Dercon, Ruth Vargas Hill and
Alemayehu Seyoum Taffesse
IFPRI ESSP-II
Improved evidence towards better food and agricultural
policies in Ethiopia; November 02, 2012
Hilton Hotel, Addis Ababa
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2. Introduction
 Weather risk remains a major challenge to farming in the arid
and semi-arid areas of the tropics;
 With ever changing climatic conditions, agriculture has
become increasingly uncertain business!
 Drought explains largest share of income variability in Ethiopia
 Household level = 60 – 75%
 National - strong GDP and rainfall variability
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3. Introduction
 Thin insurance possibilities. Informal insurance hampered
by risks correlated across households and villages;
 Index-based weather insurance offers new possibilities;
 Several experimenations, including in Ethiopia, but
demand remains invariably low; chances of scalling up
stiil very low!
 Basis-risk – a key challenge
 Efforts to mitigate basis risk are so far very limited;
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4. Introduction
 Question – design simple, flexible, and affordable generic
insurance policy that mitigates basis risk?
 Reduce basis risk by increasing side-payments?
 Institutionalization of pre-defined sharing rules needed?
 Would such insurance design work? Welfare effects?
 If so, what are the mechanism through which this would
work?
 Can we achieve the dual goal of ‘harnessing groups to mitigate
basis risk’ and ‘make them more resilient to correlated risks’?
 Approach - randomized field experiment
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5. Weather index pilot in Ethiopia
 Long run pilot—looking at group institutions takes time
 first year in 2011, second year in 2012, continues …!
 57 Kebeles selected around 3 weather stations in Oromia
region of Ethiopia – Shashemene, Dodota and Tibe;
 Primary interest is to target risk-sharing group, so we designed
the pilot such that we can evaluate effects of our intervetions!
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6. Pilot Design 57 Kebeles
(110 Villages)
TREATMENT CONTROL
(60 villages) (50 villages)
GROUP INDIVIDUAL
(35 villages) (25 villages)
MANDATED NON-MANDATED
(18 villages) (17 villages)
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7. Mandated sharing-rules
 What did we mandate?
 Discuss and set sharing rules (or bylaws) … key features
 Regular savings to a common pot;
 Contribute 10% of any insurance payout in this group to this
pot;
 Disburse this pot to members that experience idiosyncratic
basis risk, as loan at zero-interest;
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8. Provision of savings
 Money was contributed (to the pot) by project as “savings”
with the aim of
 Examine disbursements and promote trust!
 Help initiate discussions on formulation of (pre-defined)
additional sharing-rules
 Disbursed to 800 Birr to both iddir villages (mandated and non-
mandated) and individual villages (16 individuals, 50 Birr each).
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9. Insurance marketing
 Village & iddir level meetings, trainings, …
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10. Insurance marketing
 Games demonstrating chances of rain failure
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11.  Innovative Field Staff ….
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12. Insurance marketing
 Very few early season (May, June and July) polices were sold
in 2011!
 Discounts offered for late season (September/Meskerem) in
2011 & for all season in 2012 policies
 Free insurance in Dodota and Bako Tibe;
 Price discounts in Shashemene: 40%, 60%, and 80%
discounts randomly allocated across villages;
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13. Insurance sales …2011
 296 policies were sold in Shashemene (134 individuals
and 435 iddir members), about 13% of households;
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14. Payouts …2011
 September rains were poor in Shashemene – index
triggered a payout!
 Insurance payout was made at the end of October in
Shashemene.
 “Savings” payouts were also made at the end of October
in all three sites.
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15. Survey & data
 Baseline survey: February –March 2011:
 1760 households in 110 villages
(16 households per village);
 Follow up survey I: December 2011;
 Follow up survey II: February-March 2012;
 Follow up survey III: February-March 2013;
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16. Baseline characteristics … households
 High incidence of drought:
 51% experienced drought shock in the last three years;
 Very little knowledge of insurance:
 10% had heard about traditional indemnity (car, life or
health) insurance;
 High initial interest in index-type insurance:
 87% were interested in a weather indexed insurance policy
described to them in the survey;
 Indications of huge basis risk:
 only 32% thought rainfall measured at the nearest weather
station can accurately measure rainfall on their plots;
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17. Baseline characteristics … Iddirs
 Key features of Iddirs:
 Very prevalent in those areas (as in many parts of
Ethiopia)
 92% households belong to 1-5 iddirs; only 5% did not
belong to an iddir
 They are limited to ‘the village ‘…
 80% span within the village
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18. Data analysis
 Compare outcomes between the control and the following
treatment groups:
 Individual and iddir
 Mandated and non-mandated iddirs
 Run a simple ANCOVA for outcome variables of interest with
baseline data;
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19. Results
 Effects on insurance take-up:
 Interventions increased insurance purchases both in individual
and mandated iddir villages, but no statistical difference in
amount purchase between the two!
 Effects on access to loans and grants:
 Insurance improved access to grants/loans to cover crop loss
(crowding in of risk-sharing);
 Insurance increased perceived ability to finance emergencies,
but not business ventures;
 Result is driven by changes in the iddir villages, particularly
changes in the mandated ones;
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20. Results
 Impact on welfare:
 Only moderate effects in the short-term
 Where there were payouts (Shashemene):
 Those in mandated villages more likely to purchase
household durables (clothing, footwear and mobile
phones) in the 4-5 months following payouts than those in
control villages.
 Livestock ownership increased in mandated villages
 No effect on food consumption;
 Where there were no payouts (non-Shashemene sites):
 No effect on food consumption or durable purchases;
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21. Conclusions & implications
 Limits to formal and informal insurances to mitigate weather risk
 Index-based insurance unable to meet individual specific risks
 Iddirs unable to meet risks correlated across households and
villages!
 We find evidence that there is high potential to dealing with this
problem by integrating both:
 Formal insurance addressing correlated risks via the index;
 informal insurance addressing individual specific risks through
strengthening of existing iddir rules; promoting more loans &
transfers.
 Iddirs as retail outlets – reduce cost,& promote trust
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22. Conclusions & implications
 We find evidence that a product that integrates both
 Increases household welfare (purchase of household durables)
 However, for all these to work, institutionalization of new
sharing rules is required!
 Policy implications:
 Immense potential of ‘traditional groups’ for scaling up of
weather related insurance;
 Pool iddirs beyond the village, possibily bring them under one
national – risk pooling - umbrella!
 Among others, favorable national legal framework, one that
allows including international re-insurance is needed!
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23. What next …, 2012, & beyond?
 Continued with the same design, but
 Add an innovative feature to the index – gap insurance –
 A lot of optimism last Meher season (2012) –
 1537 policies sold in Shashemene (where payouts
were made in 2011)
 Payouts made in Dodota & Shashemen for May 2012
 Enthusiasm of our partner (BG) MFI for scalling up as a
business model, also linked to its saving & credit products
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24. Thank You
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